Monday, April 1, 2013

Tax Increment Financing: The Case of Bloomington Central Station

What is Tax Increment Financing?
Tax Increment Financing (TIF) is source of revenue for local governments that is a targeted form of property tax.  The funding formula is based on expected future increases in property value from an economic development project.  The key assumption underlying TIF is that the project will increase property values, and thus assessments, leading to a more robust tax base for the locality.  California was the first state to use the tool, and many states since then have adopted the practice into law.  Minnesota legalized TIF financing approximately 50 years ago and has benefited from the ability to earmark future property tax revenue to support economic development projects.

The Case: Bloomington Central Station
Located along the Hiawatha Light Rail Line, Bloomington Central Station is used here as a case study to evaluate TIF among four dimensions: adequacy, efficiency, equity, and feasibility.  Constructed by McGough Company, the development will be one of the first mixed-use “urban-villages” located on the Hiawatha line.  When complete, Bloomington Central Station is expected to provide 7,000 jobs and homes for 2,000 residents, and a 1.59 acre public park, among many other community amenities.  The site is located in South Airport Loop, southeast of Interstate 494 and Cedar Avenue and adjacent to the Minnesota River and Minnesota Valley National Wildlife Refuge. 

Adequacy Expectations and the Recession
TIF is an adequate source of revenue for local governments because its purpose is to fund specific projects, which leaves little ambiguity between expected and actual revenue.  Further, property values generally follow an upward slope, leading few localities to question its adequacy over time.  For these reasons, TIF has leveraged the adequacy of property tax to expand from small to large scale adoption among cities. However, the case of Bloomington Central Station shows that the recent market downturn changed this certainty.  The following table depicts the reality faced by community development officials mid-way through the project, as revenue was declining just as the development was beginning.  This fact has impacted the timeline for completion. In order to remedy the unstable nature of this concentrated revenue source, the State laws governing TIF should include a measure of flexibility.  For example, projects approved under the laws prior to the new law should not be subject to the changes.   The bigger question that remains is: How will the recession impact the popularity of TIF as a revenue tool?
Bloomington Central Station Project
TIF Revenue
 $                 845,337
 $                 845,096
 $                 731,627
 $                 552,475
 $                 507,290
 $                 485,000
Data from City of Bloomington Port Authority, 2013

Recommendations to Increase Equity and Efficiency
TIF scores low in equity and efficiency because its purpose is to reduce development costs in blighted areas by earmarking future property tax revenues to pay for infrastructure costs that the developer would in other cases assume.  This cost shift makes the development more attractive by reducing high risk in the blighted area.  The process reduces efficiency by changing the behavior of developers, and can also have implications for low-income and other vulnerable populations.  In the case of Bloomington Central Station, redevelopment of an existing neighborhood is not an issue as it’s a previously undeveloped site.  Thus, there is a balance between incentives for economic development and preservation of existing neighborhood dynamics.  The question remains: How can localities provide economic development incentives in transit-oriented areas while benefiting existing residents?

Generating Revenue: Feasibility in Light of Equity Considerations
TIF may be more feasible than property tax because of cost shifting to future tax revenue.   This prevents localities from raising taxes on current residents, which is a highly visible form of revenue generation.  Localities implementing TIF districts may be able to increase its feasibility among equity advocates by establishing a clear nexus between the benefit received and cost paid.  One method to accomplish this can be to explicitly tie TIF-related expenditures to comprehensive plan goals and policies through a community benefits agreement.  Bloomington Central Station has not done this, however 20% of condo units are affordable to households with incomes at 80% of the area median income.

Team 2
Bethany Brandt-SargentKaren Dewanz
Ashley JamesLexi Prahl

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